Capital Budgeting Decision Edition Economic Essay

Question:

Discuss About The Capital Budgeting Decision Edition Economic?

Answer:

Introducation

Flexible budget to determine the value of variable cost at different expenditure level. Variable cost is depended on the capacity used and revenue generated. Flexible budgets help to determine the various variable costs that are associated with different level of production. So it can be said that with the help of flexible budgets past performance of the organization can be calculated through evaluating the actual usage and budgeted usage on same level of activity. In evaluating the performance it will provide details of change in variable costs and semi variable costs. There can many reasons that make flexible budget an essential part to evaluate the part performance of the manufacturing business. Flexible budgets are beneficial where costs change frequently with the level of business activity (Pratt, 2003). For example, in the manufacturing business the budgeted overheads are segregated and added as fixed cost and other variable costs are directly linked with the level of revenue. The objective of such performance evaluation will be to evaluate the variances under actual expenses and budgeted expenses. The variances will help to focus on the particular area of expenses and all action will be taken to control the cost (Norton and Porter, 2008).

Cash Budgets are prepared to show how the cash flows within the business. The purpose of cash budget is to check the requirement of cash to fulfill the requirement of working capital within the business operation. Cash budget is typically dependent upon the three other budgets that are prepared before making the cash budgets. Cash budgets firstly needs the cash receipts that directly comes from the sales budgets, secondly cash budget need cash expenses that comes from the purchase budget and lastly any cash expenses (fixed or variable) can be taken from the projected profit and loss account and projected balance sheet.

Mainly cash receipts are received after or in 1 or 2 months of sales have been made. So it impacts the cash budget directly as any variation in prediction of cash receipts will directly change the cash requirements. Similarly in case of cash payments there will be flow of cash to the suppliers depending upon the cash credits they provide. So any change in cash credits it will directly impact the cash budget (Besley and Brigham, 2008).

Operating cycle refers to the average time taken for receipts of cash from the sale of inventory after the acquisition of inventory. Operating cycle is different from the cash cycle as cash cycle is influenced with many other factors while operating cycle in linked with the sale of inventory and cash receipts from inventory. Short operating cycle means business will receive the cash very frequently. On the other hand cash conversion cycle means days required or taken to convert the business resources into cash flows. Cash cycle is very important for any business as it tells time period taken from each dollar value of inventory is put to the production and sales made before any cash is realized (Shim, Siegel and Shim, 2011). Working capital refers to the difference of short term assets and short term liabilities. So the difference of these two these items is working capital which is needed to finance the business operations. Cash cycle means time needed to convert resources back into cash. The difference in value of cash received and cash expenses will help to finance the working capital requirement and also generates the income (Besley and Brigham, 2008).

A Government organization varies from not profit organization to profit sharing basis organizations. Not profit organizations work for the public interest with a motive to earn the profits. Accounting in the non government organization will reveals only the cash received and cash paid at various public benefit transactions. Private companies are required to report the government and the top management about the profitability of the company. In case of government there are no such liabilities, so therefore it is not compulsory to follow each and every step for accounting in government organization (Bierman and Smidt, 2007).

Cost accounting refers to the process of collecting the information about the cost of products, recording them properly, classifying them accordingly, and lastly analyzing and summarizing the various elements of cost to provide the management with best alternative they can adopt for making the policies regarding the cost efficiency and coat capabilities. Under the costing system there are many costing process such as activity based costing system, traditional costing system, and standard costing etc. These systems provide information regarding the cost behavior and cost control (Pratt, 2003).

Given Details in the question

Budget for the year

Direct labour costs for the year

$ 537,600.00

Manufacturing overheads for the year

$ 598,080.00

Administrative overheads for the year

$ 695,520.00

Direct labour hours for the year

14000.00

Total machine hours for the year

7000.00

Manufacturing Overhead rate for the Wonder products is as follows:

Manufacturing overheads are distributed on the basis of machine hours are consumed, therefore manufacturing overhead allocation rate will be calculated as under:

Calculation of the Manufacturing overhead allocation rate

Manufacturing overheads for the year

$ 598,080.00

Total machine hours for the year

7000.00

Manufacturing overhead allocation rate

$ 85.44

Administrative overhead allocation rate for Wonder Products is as follows:

Administrative overheads are distributed on the basis of direct labour hours are consumed, therefore administrative overhead allocation rate will be calculated as under:

Calculation of the administrative overhead allocation rate

Administrative overheads for the year

$ 695,520.00

Direct labour hours for the year

14000.00

Administrative overhead allocation rate

$ 49.68

Price quoted to the Bushy George to build the especially ordered wonderful creation is calculated as under:

Calculation of the Labour hour rate

Direct labour costs for the year

$ 537,600.00

Direct labour hours for the year

14000.00

Labour Hour Rate

$ 38.40

(Besley and Brigham, 2008)

Calculation of price for especially ordered wonderful creation

Particulars

Amount

Direct materials

$ 19,000.00

Direct labour

$ 28,800.00

Manufacturing overheads

$ 34,176.00

Administrative overheads

$ 37,260.00

Total Cost

$ 119,236.00

Add: Mark up @40% of total cost

$ 47,694.40

Price to be quoted to Bushy George

$ 166,930.40

Overhead expenses are not directly identified in the products as it occurs in relation to manufacturing process not with the manufacturing process. Overhead rates such as administrative overhead rate and manufacturing overhead rate are linked with how much labour hours and machine hours has been used in the product. While considering the cost related to job or taking decision regarding the price than there is need to check the overheads that are used indirectly to arrive the total cost (Pratt, 2003). While producing different products there is use various activities and cost related to that activity is needed to include in the total cost. In traditional costing approach all indirect overheads are allocated using one overhead rate like machine hour or labour hour rate. Under this approach, activities that are not even used in the particular product become part of it. Alternative approach for this is activity based costing (Adler, 2013).

Predetermined overhead rate are used to calculate the unit cost of the product due to many reasons. It is easier to calculate the cost of product using the budgeted overhead rate rather than using the actual overhead used in the product. It also simplifies the cost accounting work at the year end. Every product uses some cost of overhead but it is very time consuming process so companies think fit to use the budgeted overhead rate (Besley and Brigham, 2008).

References

Adler, R. 2013. Management Accounting. Routledge.

Besley, S. and Brigham, E. F. 2008. Essentials of Managerial Finance. Cengage Learning.

Bierman, H., and Smidt, S. 2007. The Capital Budgeting Decision, Ninth Edition: Economic Analysis of Investment Projects. Routledge

Norton,C. and Porter, G. 2008. Financial Accounting: The Impact on Decision Makers. Cengage Learning.

Pratt, S. P. 2003. Cost of Capital: Estimation and Applications. John Wiley & Sons.

Shim, J.K., Siegel, J.G. and Shim, A.I. 2011. Budgeting Basics and Beyond. John Wile

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